Why Indians aren’t happy with 8% economic growth

By Andy Mukherjee

Indian Prime Minister Narendra Modi likes to hold back bad news from people until it doesn’t matter any more to his political prospects.

In 2019, his administration was accused of hiding a labor survey that, when it was finally released after his reelection, showed unemployment at a 45-year high. This year’s election, which saw him return with a diminished majority, has coincided with a long-awaited report on the plight of people who have work but are struggling to get by.

It’s impossible to make sense of India’s employment situation — or consumer demand — by only looking at the fifth of the labor force that holds regular jobs. The rest are either self-employed or work when they can find it.

About 110 million toil at 65 million tiny nonfarm jobs scattered across the country. Most of the labor comes from family members. But establishments that do hire outside staff paid employees less than Rs 125,000 ($1,500) a year, on average, according to an official survey conducted in the 12 months through September 2023. This is 1 per cent less than what workers were making between April 2021 and March 2022, a period marked by a deadly second wave of Covid-19, followed by a gradual reopening of the economy.

The annual scorecard on unincorporated enterprises, released for the first time Friday, talks of a “robust” near-8 per cent growth in the number of workers. But what is the quality of this employment? The data shows that of the 30 million employed by these small, non-agricultural firms for a wage, 27 million are engaged informally, without any social security. That’s an increase of 6 million since the pandemic in the number of people earning as little as $1,100 a year in rural areas, and a third more than that in urban centers.

Worse still, the compensation for informal labor in villages was practically unchanged between the two survey rounds. That was even as consumer prices for agricultural workers jumped 10 per cent, mimicking the global surge in post-pandemic inflation. Including family and paid labor in rural and urban areas, each person is adding just about $1,700 in value in a year, a 2.6 per cent increase from 2021-22. So why are so many Indians stuck in these low-productivity hovels where their incomes are insufficient to cope with prices?

The reason may be simple enough. The growth in gross domestic product, which at 8 per cent-plus is the fastest among major economies, is clearly not creating enough employment. Surplus Indian labor is stranded in villages, somehow trying to cope with the double whammy of high cost of living and lack of better-paying formal jobs.

This excess rural labor could be distorting the inflation picture, according to a recent study by ANZ Group Holdings Ltd. Despite weak rural demand, inflation in villages is 5.3 per cent, whereas in cities it’s close to the central bank’s 4 per cent target. Even inflation expectations are higher in villages. The puzzle may be partly explained by the missing train journeys — 100 million fewer every month than before the pandemic. Something is broken with the regular rural-to-urban migration pattern. From fuel to recreation, an artificially bloated consumer base and sluggish supply-chain adjustments could be “burdening” rural markets, say ANZ economists Dhiraj Nim and Sanjay Mathur.

It will be helpful for the central bank to know that people earning less than $4 a day for informal work in villages are witnessing no income growth. So it’s entirely possible, as the ANZ analysts explain, that these worker families switched to traditional fuel substitutes like cow-dung cakes, coal or charcoal when liquefied petroleum gas got more expensive because of the war in Ukraine. Reducing the price of cooking-gas cylinders — one such cut was announced by the government just before the polls — may do more to lower urban inflation than address rural price pressures. Those might respond better to targeted fiscal subsidies for job creation than higher-for-longer interest rates.

Playing politics with data can be dangerous. Analysts have been wondering why it was taking so long to get any information on how the more informal part of the economy has fared during and after the pandemic. Although very few of them openly raise their concerns, the disconnect between the rosy GDP numbers and weak consumer demand — growing at half the pace of overall output — has also been a worrying development for executives whose businesses rely on mass consumption.

None of this is a problem for the stock market. It is buoyed by visions of massive infrastructure creation and private capital expenditure in Modi’s third term. The savings of a small affluent class have poured into accounts with retail brokers. Zerodha, the largest among them, recently boasted that its customers hold Rs 4,50,000 core in assets, enough to buy the country’s largest carmaker if that’s what the savers wanted. Most of this stock-chasing money has accumulated since the pandemic. Investors have taken Rs 50,000 crore in profit and are sitting on unrealized gains of another 1 trillion— and that’s just one broker’s numbers.

However, a nation of 1.4 billion people is ultimately powered by mass spending. That requires jobs and incomes at the bottom of the pyramid, not just the top. By stopping the ruling Bharatiya Janata Party well short of a parliamentary majority, the voters have sent a message. The stagnant wage of a worker at a mom-and-pop operation may be an uncomfortable detail in the equity market’s cheery story of rapid GDP growth, but it matters. Both to the economy, and Modi’s political longevity.